DIFF BETWEEN COMMISSION AND TRADE DISCOUNT, Income Tax

[PRAVIN SINGH]

WHAT IS DIFFERENCE BETWEEN TRADE DISCOUNT AND COMMISSION ?

KINDLY DO THE NEEDFUL FOR THE SAME WITH AN EXAMPLE

Posts / Replies

[KRISHNAN SURYANARAYANAN]

TRADE DISCOUNT vs. COMMISSION

 

The provisions of section 194 H which deal with tax deducted at source on payments made on commission or brokerage are not applicable to trade discounts as was held by the Hon’ble Gujarat High Court in the case of Ahmedabad Stamp Vendors Association vs. Union of India [2002] 257 ITR 0202. This is what the Gujarat High Court observed at page 215 in this case -

“It is also not possible to accept the contention of Mr. Naik for the revenue that the definition of ‘commission or brokerage’ as contained in Explanation to section194 H is so wide that it would include any payment receivable, directly or indirectly, for services in the course of buying or selling of goods and that, therefore, the discount availed of by the stamp vendors constitutes commission or brokerage within the meaning of section 194 H. If this contention were to be accepted, all transactions of sale from a manufacturer to a wholesaler or from a wholesaler to a semi-wholesaler or from a semi-wholesaler to a retailer would be covered by section 194 H. To fall within the aforesaid Explanation, the payment received or receivable, directly or indirectly, is by a person acting on behalf of another person (i) for services rendered (not being professional services) or (ii) for any services in the course of buying or selling of goods or (iii) in relation to any transaction relating to any asset, valuable article or thing. The element of agency is to be there in case of all services or transactions contemplated by Explanation (i) to section 194H. If a car dealer purchases cars from the manufacturer by paying price less discount, he would be the purchaser and not the agent of the company, but in the course of selling cars, he may enter into a contract of maintenance during the warranty period, with the customer (purchaser of the car) on behalf of the company. However, such services rendered by the dealer in the course of selling car does not make the activity of selling car itself an act of agent of the manufacturer when the dealings between the company and the dealer in the matter of sale of cars are on ‘principal to principal’ basis. This is just an illustration to clarify that a service in the course of buying or selling of goods has to be something more than the act of buying or selling of goods”

2. TheGujaratHigh Court also referred to the distinction between commission and discount in the following words-

“At this stage, we may also make a reference to the distinction between “commission” and “discount” as explained in law dictionaries and in judicial pronouncements.

In Black’s Law Dictionary, “Commission” and “Discount” are defined and explained as under:

 

Commission:

The recompense, compensation or reward of an agent, salesman, executor, trustee, receiver, factor, broker, or bailee, when the same is calculated as a percentage on the amount of his transactions or on the profit to the principal Weiner v. Swales 217Md.123 ; 141 A.2d 749, 750. A fee paid to an agent or employee for transacting a piece of business or performing a service. Frayer v. Currin App. 280 SC 241; 312 S.E. 2d 16, 18. Compensation to an administrator or other fiduciary for the faithful discharge of his duties.

 

Discount:

In a general sense, an allowance or deduction made from a gross sum on
any account whatever. In a more limited and technical sense, the taking of interest in advance.

 

A deduction from an original price or debt, allowed for paying promptly
or in cash. Method of selling securities (e.g., treasury bills) which are issued
below face value and redeemed at face value . . .

To purchase an instrument or other right to the payment of money, usually for an amount less than the face amount or value of the right.”

 

 

3. TheGujaratHigh Court also referred to the following decisions to reinforce the difference between commission and discount in the following words - 

”In Harihar Cotton Pressing Factory v. CIT [1960] 39 ITR 594, the Bombay
High Court explained the distinction between the two expressions as under
(head note) :

“The expression ‘commission’ has no technical meaning but both in legal
and commercial acceptation of the term it has definite signification and is
understood as an allowance for service or labour in discharging certain duties
such as for instance of an agent, factor, broker or any other person who
manages the affairs or undertakes to do some work or renders some service to
another. Mostly it is a percentage on price or value or upon the amount of
money involved in any transaction of sale or service or the quantum of work
involved in a transaction. It can be for a variety of services and is of the nature
of recompense or reward for such services. ‘Rebate’, on the other hand, is a
remission or a payment back and of the nature of a deduction from the gross
amount. It is sometimes spoken of as a discount or a draw-back. The dictionary
meaning of the term includes a refund to the purchaser of a thing or
commodity of a portion of the price paid by him. It is not confined to a transaction
of sale and includes any deduction or discount from a stipulated payment
charge or rate. It need not necessarily be taken out in advance of payment
but may be handed back to the payer after he has paid the stipulated
sum. The repayment need not be immediate. It can be made later and in case
of persons who have continuous dealings with one another it is nothing un-
usual to do so.”

Similarly, in Coromandel Fertilisers Ltd. v. Union of India [1984] 17 ELT 607,
(para. 12) and in Moped India Ltd. v. Assistant Collector of Central Excise [1986]
23 ELT 8 (para. 6), the apex court applied the aforesaid principles while considering the question of arriving at the excisable value of mopeds. The trade
discounts given to the dealers by the manufacturer were held to be liable to be
deducted from the price charged to the dealers for the purpose of arriving at
the excisable value of the goods, but the commissions given to the agents were
held to be not deductible from the price for the purpose of arriving at the
excisable value of the goods.”

 

4. This decision of the Gujarat High Court in the case of Ahmedabad Stamp Vendors Association vs. Union of India (supra) has been followed in the following cases

(a)KeralaStateStamp Vendors Association v. Office of the Accountant-General (2006)-282-ITR-007(Ker).

This is what the Kerala High Court observed in this case-

“Though standing counsel pointed out that section 194H provides for TDS on any payments for any service rendered in the course of buying and selling of goods whatever be the nature of payment, whether it be paid as discount or otherwise, I do not think the section contemplates discount granted by the seller to the buyer as “commission or brokerage” “

(b) Government Milk Scheme v. Assistant Commissioner of Income-tax (2006)-281-ITR (A.T.)-0088-ITAT (Pune)

Head note of ITR

“All statutory definitions or provisions must be read subject to the qualification variously expressed depending upon the subject or the context. So, a judicial authority has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances. Whether statutes are to be understood in terms of their plain language or in terms of their intention is only a question of approach. The first approach should be to read the words as they are. If they give a coherent and cogent meaning without leading to absurd or anomalous results, then the only thing that should be done is to follow the words of the statute, literally. This is the rule of literal interpretation.

For a payment to fall within the category of commission there must be a relationship of principal and agent. The commission is a compensation to an agent for services to be rendered. It is an allowance or reward made to agents. This is calculated on a percentage basis on the amount of the transaction or the profits to the principal. There is a distinction between a contract of sale and a contract of agency. Through a contract of agency, an agent is authorised to sell or buy on behalf of the principal. On the other hand, the essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. In the context of a contract of sale, the transferee is liable to the transferor as a debtor for the price paid and not as an agent for the proceeds of the sale. The distinction between the two is apparent because the essence of “agency to sell” is the delivery of goods to a person who is to sell them not as his own property but as the property of the principal who continues to be the owner of the goods”

(c) Assistant Commissioner of Income-tax v. Idea Cellular Ltd.(2009)-317-ITR(A.T)-0176-ITAT(Hyd.)

It has been held in this case that discount allowed on outright purchase is not commission. It is more so when there is no relationship of principal and agent and transactions are done on principal to principal basis.

 

5.OTHER DECISIONS

1. CIT vs.Singapore Airlines Ltd.(2009)-180-Taxman-128(Del)

It has been held in this case that when the transaction is one that between principal-to-principal the difference in price would be only be discount falling outside the purview of provisions of section 194H of the Act. The issue in this case related to issue of airline tickets at a discounted rate and the assessing officer wanted to apply the provisions of section 194F of the Act on the discount value of the ticket

2. Foster’s India (P) Ltd. vs,ITO(2009)-29-SOT-32(Pune)(URO)

The Pune Bench of ITAT in this case held that in order to invoke provisions of section 194H of the Act it is necessary that there must exist relationship of principal and agent between parties as it is only in such a situation that payments can partake character of commission attracting the provisions of section 194H of the Act. In this case incentives were given in the form of discount by the assessee-company which was engaged in business of manufacture and sale of beer to its distributors and these incentives were held to be outside the purview of provisions of section 194H of the Act.

3. Assistant Commissioner of Income-tax vs.Samaj(2001)-77-ITD-358(Cuttack)

It has been held in this case that when there is a contract for sale and there is no element of agency, meaning thereby principal and agent relationship between parties, discount payment cannot be described and held as commission  subjecting it to provisions of section 194H of the Act and it would be outside the purview of section 194H.

4. S.D.Pharmacy (P) Ltd. vs. Deputy CIT (2009)-31-SOT-386(Cochin)

It has been held in this case, following the decision of the Hon’ble Kerala High Court in the case of   Kerala State Stamp Vendors Association v. Office of the Accountant-General(2006)-282-ITR-007(Ker)that trade discount granted by assessee to parties does not partake the character of commission warranting deduction of tax under section 194H of the Act.

5. Mother Dairy India Ltd. vs.ITO (2009)-28-SOT-42(Delhi)

It has been reiterated that when the transactions take place between two principals provisions of section 194H do not come into play.

 

[pradeep khatri]

On commission, service tax is applicable but there is no VAT/CST on Trade Discount.

Commission is paid for selling, buying, collection of payment or any mercantile activity while Trade discount is given for enhancing sales or as customerily it is given.